States Act on Tax Reform

April 9, 2014

The United States is in dire need of tax reform. Unfortunately, it doesn't look like it will come at the federal level any time soon, say Grover Norquist, president of Americans for Tax Reform, and Mark Green, a state senator from Tennessee.

The situation is different in the states, like in Tennessee, one of the nine U.S. states without personal income taxes.

From 2002 to 2012, those nine states saw 30 percent greater growth in gross domestic product than the nine states with the highest marginal tax rates.

And over the last 10 years, those nine states outperformed the U.S. economic growth rate by more than 25 percent.

Americans are flocking to these low-tax states.

Over the last 10 years, population growth among the nine no-tax states was 149 percent higher than the nine highest income tax states.

Over that same time, 43 million Americans with $2 trillion in income moved between states.

However, while Tennessee is considered a no income tax state, it does tax investment income, with dividend and interest income taxed at 6 percent. In Tennessee, the tax is known as the Hall Tax. Recently, state lawmakers proposed a bill that would phase out the tax over six years.

While detractors will cast the tax cut as a cut for the rich, more than 57 percent of Tennessee residents receiving investment income are actually from households with less than $75,000 in annual income.

Forty percent of those earning dividends in Tennessee make less than $50,000.

It the state gets rid of the Hall Tax, it will move from being the country's 15th best business tax climate up to the 11th.

Right now, the tax is responsible only for 0.9 percent of Tennessee's total state and local tax revenue, yet this tiny benefit to the state is outweighed by the harm done to its business climate.

North Carolina already overhauled its tax code, and other states are making similar moves. Tennessee needs to get rid of the tax in order to remain competitive.